Chapter 14 - The Costs of Production

ECON 1101 Midterm II

profit

TR - TC

total revenue (TR)

P x Q

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm

total costs (TC)

• explicit costs + implicit costs

• fixed cost + variable cost

economic profit

TR - (explicit costs + implicit costs)

accounting profit

TR - explicit costs

production function

relationship between quantity of inputs used to make a good and the quantity of output of that good

marginal product

increase in output that arises from an addition unit of input

• e.g., slope of production function

diminishing marginal product

marginal product of an input declines as the quantity of the input increases

• e.g., slope of production function decreases

total-cost curve

relationship between quantity produced and total costs

fixed costs (FC)

costs that do not vary with the quantity of output produced

variable costs (VC)

costs that vary with the quantity of output produced

average variable cost (AVC)

VC / Q

• typically rises as output increases

average fixed cost (AFC)

FC / Q

• always declines as output rises

average total cost (ATC)

TC / Q

marginal cost

increase in total cost arising from an extra unit of production

• ∆TC / ∆Q

economies of scale

long-run average total cost falls as the quantity of output increases

• e.g., increasing specialization among workers

constant returns to scale

long-run average total cost stays the same as the quantity of output changes

diseconomies of scale

long-run average total cost rises as the quantity of output increases

• e.g., increasing coordination problems

efficient scale

quantity of output that minimizes ATC